Rampant inflation in the eurozone continues to heap pressure on ECB

(Alliance News) - Consumer inflation in the eurozone was more than 9% in August, heaping pressure on the continent's central bank to help customers battle runaway energy costs.

The annual eurozone inflation rate hit a fresh high of 9.1% in August, beating expectations, data from Eurostat showed on Wednesday. July's inflation rate was 8.9%. August's rate was expected to edge up to 9.0%, according to FXStreet.

"The inflation data from the eurozone this morning won't have hurt the odds of a 75 basis point hike, that's for sure," Oanda analyst Craig Erlam said.

He believes the reading will see pressure on the ECB "seriously mount".

"The central bank is paying the price for its decision to leave the deposit rate at negative 0.5% for as long as it did and may have to be much more forceful now as a result," Erlam continued. "Price pressures are becoming more widespread, with energy increases easing slightly but food, alcohol and tobacco inflation accelerating to 10.6%. The inflation situation is, unfortunately, going to get worse, perhaps much worse, before it gets better considering what's to come with energy this winter."

Energy prices remained elevated, though the increase eased nominally to 38% in August from 40% in July. Food, alcohol & tobacco prices ticked up, rising 11% versus 9.8% in July.

ING's eurozone Senior Economist Bert Colijn said: "The increase was mainly seen in processed food and goods prices, but services also ticked up slightly. Energy inflation fell for the second month in a row on base effects and lower petrol prices, despite soaring gas and electricity prices.

"The main concern is the surprise increase in goods inflation. The increase from 4.5% to 5% was much larger than expected and fuels worries about second-round effects from the input cost shock lasting longer."

Core inflation - which strips out energy, food, alcohol and tobacco - accelerated to an annual rate of 4.3% in August from 4.0% in July. A year ago, the rate was 1.6%.

Colijn added: "As the economy is slowing rapidly – and perhaps already contracting at this point – the question is how much the ECB needs to slam the brakes. Another hike of at least 50 basis points in September seems to be a done deal, with the hawks pushing for 75bp.

"The big question is how the ECB will respond after this, if indeed signs of economic distress become more apparent, and inflation remains highly driven by supply-side factors."

The president of the Deutsche Bundesbank Joachim Nagel called for a significant interest hike on Wednesday, given the record inflation rates in the Eurozone.

"We need a strong rise in interest rates in September. And further interest rate steps are to be expected in the following months," Nagel said in Frankfurt.

"Households that already have little money to make ends meet are being hit particularly hard. There is a risk that the phase of high inflation will persist even longer and the current wave of rising prices will be slow in subsiding," Nagel warned.

Indeed, unless action is taken, Nagel said that there was a risk that "inflation expectations could become permanently entrenched above our target of 2%."

A decision on interest rates by the European Central Bank is due on September 8.

The ECB raised interest rates in July for the first time in 11 years, to 0.5% from zero. Another rise of 0.5 percentage points has been hinted at, but the ongoing high inflation has prompted calls for more drastic action.

By Paul McGowan; [email protected]

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